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Peregrine CEO indicted for lying to regulators

August 14, 2012 By Leave a Comment

155ac68dbbc20a03f4efdc36d54b0a26 Peregrine CEO indicted for lying to regulators

() – Peregrine Financial Group founder and chief executive was indicted on charges of lying to regulators, a little over a month after he botched a and confessed to bilking customers of his brokerage for years.

Wasendorf, 64, “overstated the value of PFG’s customer segregated funds by at least tens of millions of dollars” to the Commodity Futures Exchange Commission, according to the indictment, filed in federal court in Cedar Rapids, Iowa.

The indictment carries a possible maximum sentence of 155 years in prison, a $7.75 million fine, and 93 years of supervised release following any imprisonment, the U.S. Attorney’s office said.

The public defender representing Wasendorf Sr could not immediately be reached for comment.

Peregrine filed for on July 10, one day after Wasendorf Sr attempted suicide and left a note describing how he had stolen from customers for nearly 20 years.

The of what was once a mid-sized has dealt a blow to confidence in the futures industry, coming less than a year after MF Ltd’s bankruptcy, which left customers with a $1.6 billion shortfall and is still being investigated.

The has said Wasendorf Sr misappropriated more than $200 million in customer funds.

His former customers are baying for blood.

“He should rot in a prison cell, like Bernie Madoff,” said Ronald Riehm, a coin dealer from Johnston, Iowa, who has $51,000 tied up at the firm. “He lived for 18 and a half years a life of luxury on stolen money. I have no sympathy for him whatsoever.”

Ponzi schemer , 74, pleaded guilty in March 2009 and is serving a 150-year sentence in a North Carolina federal prison.

“It just seems as though the people that own these firms feel that they’re playing with ,” said James Cordier, principal and founder of Liberty Trading Group, noting that MF Global CEO has not been charged with any wrongdoing.

“This is people’s hard-earned money that they invest. They’re taking their chances in the market, but never in their wildest dreams do they think this could happen. Someone has to stop this.”

The indictment does not mention Wasendorf Sr’s alleged misuse of customer money, but only asserts that he misrepresented the value of customer funds from February 2010 to June 2012.

An indictment means a person has been formally charged by a grand jury. Additional charges can be added later, in superseding indictments, as the grand jury continues to weigh testimony and evidence.

Using little more than a post office box, laser printers and Photoshop software, Wasendorf Sr said in his confession that he forged and intercepted financial statements that were mailed between U.S. Bank, where some Peregrine customer money was held, and the firm’s auditors at the National Futures Association.

He also said he spent most of the stolen money trying to keep his brokerage afloat.

The federal probe into Wasendorf Sr continues as the grand jury hears testimony from witnesses, including the company’s president, Russell Wasendorf Jr, son of the CEO.

“He testified and answered all questions and continues to cooperate with the FBI,” said Nicholas Iavarone, Wasendorf Jr’s attorney.

Wasendorf Sr is being held in a county jail and his next appearance for an arraignment has not yet been set, the U.S. Attorney’s office said.

(Reporting by Ann Saphir in San Francisco, and Tom Polansek and P.J. Huffstutter in Chicago; Editing by Phil Berlowitz)

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Insight: The curious case of Iowa broker’s Romanian property empire

July 13, 2012 By Leave a Comment

fc9959fb2fc3a117298c004ea8e03cd2 Insight: The curious case of Iowa brokers Romanian property empire

() – ., the founder of failed Iowa brokerage , had a long way from the Midwest markets where he built his name.

More than a decade before he allegedly began hiding more than $200 million of misappropriated in a scheme that unraveled this week, Wasendorf joined three other Chicago traders as founding investors in one of Romania’s largest real estate development groups, Avrig 35 Group, which was valued at more than $1 billion at its height in 2007.

But since 2007 the paper value of his holdings has crashed from around $150 million to less than $45 million, as Avrig has written down investments.

As Avrig’s complex web of dozens of firms struggles to trade its way out of difficulties, Alexander Hergan, Wasendorf’s Romanian-born business partner and a former options trader and founding member of the Chicago Board of Options Exchange (CBOE), hopes the drama in Iowa doesn’t upset the firm’s recovery.

“I don’t want any kind of from Russell’s situation to spill into the Avrig Group,” he said in a telephone interview from Romania.

“Avrig 35 was put into insolvency just recently but we’ve been successful in working our way out of this. We plan to pay down $50 million of our debts in the next two months. We have saved this company in the past year.”

The firm, well-known in Romania for having built the country’s tallest building, adds an unlikely new dimension to the deepening mystery around Wasendorf, whose attempted suicide on Monday set off an , a lawsuit from regulators, and the of PFGBest into bankruptcy.

Avrig’s problems after the 2008 also shed new light on Wasendorf’s finances, the subject of as investors seek to trace the missing U.S. funds.

Hergan said he didn’t believe Wasendorf’s alleged misuse of PFGBest could be related to Avrig’s financial problems.

Asked if he was concerned U.S. regulators may want to look at Avrig as part of their investigation, he said the group would cooperate fully with any investigation.

“Of course we’ve thought about it, but we’re not concerned. They could go after his assets, they could go after his shares in Avrig Group, but the other shareholders will buy them as the value is currently depressed,” Hergan said.

“There is nothing we have to hide.”

GO HOME AND GO BIG

Hergan, who emigrated to the United States in 1966 at the age of 19, says he and Mark Proskine — father of current Avrig CEO Matthew Proskine — met Wasendorf in the 1990s, when the Iowa native attempted to buy their trading seats on a Chicago exchange.

While the deal eventually fell through, they maintained contact. Years later, Hergan pitched the idea of investing together in his native Romania, which was entering a period of explosive economic growth a decade after the 1989 collapse of Nicolae Ceau?escu’s brutal communist regime.

Hergan said that Wasendorf, Hergan, the elder Proskine — and one other Chicago-based investor he declined to name — put up $500,000 each in 1999 to launch the venture. Hergan moved back to Bucharest the same year.

Avrig rode the boom. The firm was involved in the construction of some of the largest buildings in Romania, including a partnership that built the country’s highest skyscraper, the 26-story Bucharest Tower Center, in 2007.

At its peak in 2007, Wasendorf’s Romanian investment would likely have dwarfed the value of PFGBest. It was at this time that Wasendorf embarked on his plan to relocate PFGBest from Chicago to his home state of Iowa, designing an $18 million, 15,000-square-meter custom-built complex in Cedar Springs.

NEVER VISITED

Wasendorf wasn’t involved in the day-to-day running of Avrig, Hergan said, and never visited Romania. But the men would talk by telephone, and met in Chicago at least once a year for the group’s annual investor meeting.

Avrig expanded to more than 60 companies by 2008, branching into sectors as diverse as television channels, retail stores and asset management. By 2007, UBS bank was advising the company about listing on the London Alternative Investment Market (AIM), and valued the group at more than $1 billion.

On paper, Wasendorf’s initial $500,000 investment in the group had ballooned. While his stake in the company had been diluted to less than 15 percent as Hergan brought in other investors, it would still have been worth as much as $150 million, or 300 times the original investment in just 8 years.

Plans to list Avrig in London collapsed with the onset of the financial crisis.

“When the hard times hit…the banks just stopped funding us, some when we were right in the middle of construction,” Hergan said. “The market just stopped functioning.”

By July of last year, the group faced a series of petitions from creditors trying to push Avrig into insolvency due to mounting debts. The Bucharest Tower Center skyscraper had stood empty for at least three years, and Avrig hadn’t sold a significant property since the onset of the crisis.

Financial data obtained by Reuters from the Romanian finance ministry showed that Avrig had amassed total debts of about 135 million lei ($36.6 million) on its balance sheet by 2010. That has more than doubled to around $80 million now, according to Hergan.

While the company is still operating, its bank account balance was just 13,240 lei ($3,600) at the end of 2010, the data showed. It had made a loss in each of the past three years.

CAPITAL CALL

Between 2007 and 2011, Wasendorf contributed cash to three to four relatively small ‘capital calls’ from Avrig, said Matthew Proskine, in the same telephone interview. He said this culminated in a larger $750,000 investment last year.

“They have all been repaid with interest already,” Hergan said.

Hergan said when he had met Wasendorf last year “he seemed a little more tense” but that he hadn’t thought anything of it at the time.

Wasendorf is currently at an Iowa hospital after apparently attempting to commit suicide in his car outside PFGBest’s Cedar Falls headquarters on Monday.

“I never dreamt of the possibility of him being involved in something like this,” Hergan said. “When these things happen people are left shaking their heads.”

(Reporting By David Sheppard and Radu Marinas; Editing by Jonathan Leff and Martin Howell; additional reporting by Joshua Schneyer and Ann Saphir in Chicago)

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Exclusive: U.S. probing failed broker PFGBest’s use of small auditor

July 12, 2012 By Leave a Comment

5466b8f078280cd0c159c13d1fda14c0 Exclusive: U.S. probing failed broker PFGBests use of small auditor

() – U.S. futures industry investigators are looking into why Iowa-based collapsed brokerage used a tiny accounting firm that appears to be operating from inside a suburban Chicago home to audit its books, according to a person familiar with the matter.

Experts said the use of such an auditor should have been a red flag to regulators of a with more than $500 million in assets and several hundred employees across the United States as well as in Shanghai and Canada.

There are comparisons with the way convicted Ponzi schemer used an auditor operating out of a strip mall in suburban New York and convicted swindler Allen Stanford’s investment firm retained a little-known auditor on the Caribbean island of Antigua.

PFGBest’s financial statement ended December 31, 2010, shows that a firm called Veraja-Snelling Company, based in Glendale Heights, Illinois, certified that the futures broker was in compliance with federal commodities regulations governing the segregation of customer money.

On Tuesday, the U.S. accused the now-bankrupt brokerage and its founder . of misappropriating roughly $200 million of customer money in a fraud it said dates back to at least February 2010, and then lying to cover it up.

The alleged fraud came to light after Wasendorf’s apparent on Monday morning outside the firm’s Cedar Falls, Iowa, offices.

The is looking into the role of the auditor as it continues to investigate PFGBest, said the person familiar with the matter, who was not authorized to speak publicly.

When reached at her Glendale Heights home on Tuesday night, Jeannie Veraja-Snelling, who listed herself an officer of the firm when she registered with the Public Company Accounting Oversight Board in February 2010, said she could not talk about PFGBest.

“I don’t know what’s going on. I just found about it all an hour ago so I can’t talk about it,” said Veraja-Snelling, appearing distraught.

A PFGBest spokeswoman did not return a call seeking comment.

Another source told Reuters on Tuesday that Wasendorf went to great lengths to fabricate PFGBest’s financials, saying he intercepted confidential regulatory documents that were mailed by the National Futures Association to what the industry self-regulatory group believed was U.S. Bank, the bank used by PFGBest.

Instead, the NFA was sending the documents, used to independently verify a broker’s bank balances, to a post office box that Wasendorf had set up, the source said.

In the 2010 report, Veraja-Snelling & Co wrote that there were no material weaknesses involving internal controls and that the “corporation’s practices and procedures were adequate.”

The NFA confirmed that the accounting firm, which has no disciplinary history with Illinois financial regulators and has not been accused of any wrongdoing, also audited PFGBest’s 2011 financial statements.

It was not clear if it was still PFGBest’s auditor at the time of its bankruptcy filing on Tuesday.

An NFA representative declined to comment further. A CFTC spokesman did not have an immediate comment.

HOME BUSINESS

Veraja-Snelling & Co is located on a busy, four-lane street inside a modest house, that is a faded-pink color, in Glendale Heights, some 30 minutes outside of Chicago.

Jeannie Veraja-Snelling has been certified in the state of Illinois since 1999.

However, she does not list having any public company clients in her 2011 annual filing with the PCAOB.

On Tuesday night, she came to the door wearing a green sleeveless shirt and blue denim shorts. A stack of cardboard filing boxes was sitting just inside the door.

She declined to answer questions about how she came to be retained by PFGBest. She did not respond to a follow-up e-mail and voice mails asking questions.

Little information appears to be publicly available about Veraja-Snelling.

According to online records submitted to the U.S. Securities and Exchange Commission, the firm audited some broker-dealers, including Best Direct Securities, LLC, which is owned by PFGBest, for the year ending December 31, 2009.

The online records also indicate Veraja-Snelling has audited other small-sized securities brokers, such as Chicago-based Arclight Securities LLC for its 2007 financial statement, and Corporate Investments Group over several years, including 2011.

Audit experts say that just because PFGBest hired a small auditor to do its books does not necessarily say anything about the auditor’s competence.

Instead, they said, it speaks more to the management of PFGBest and why the firm did not pick a larger auditor with a more established reputation.

“Typically if you are in a business like this, you want to have people have confidence in your numbers and feel like you have got a big name behind them,” said Lynn Turner, a former chief accountant for the SEC.

The failure of regulators at the NFA to notice some of the red flags, they added, is also troubling.

“You would think that a regulator would notice this and that should trigger much higher scrutiny,” said Tom Selling, who writes an accounting blog called the Accounting Onion. “There’s no question that the regulator’s protocol should take that into account, especially a sole practitioner.”

INVESTIGATION CONTINUES

Experts say it is not common for the CFTC to bring actions against auditors, but it is not unprecedented.

In September of last year, the CFTC charged the national accounting firm McGladrey & Pullen and its partner David Shane with issuing an unqualified audit opinion on futures brokerage One World Capital Group.

At the time the case was filed, David Meister, the head of CFTC enforcement, stated that “the commission will not hesitate to impose significant sanctions on auditing firms and hold individuals personally responsible when they fail to adhere to their professional obligations.”

The company and the audit partner settled the CFTC’s case without admitting or denying the charges. The firm agreed to pay $900,000, and Shane paid $100,000.

Another potential regulatory body that could look into the situation is the PCAOB, which gained new authority under the 2010 Dodd-Frank Wall Street reform law to inspect auditors of broker-dealers.

A PCAOB spokeswoman declined to say if Veraja-Snelling had been inspected under the new program, or whether the PCAOB will investigate the firm in light of the alleged fraud at PFGBest.

Joseph Carcello, a professor at the University of Tennessee, said the PCAOB has limited resources but may look into PFGBest’s audits because of the publicity around the case.

“It has some echoes of Madoff … I’d be shocked if they don’t think about it,” he said.

(Reporting By Sarah N. Lynch, Emily Stephenson and Nick Carey; Editing by Karey Wutkowski, Martin Howell and Chris Gallagher)

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